Study of the Liability Risk-Sharing Regime in the United States for Commercial Space Transportation

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AEROSPACE REPORT NO.

ATR-2006(5266)-1

Study of the Liability Risk-Sharing Regime in

the United States for Commercial Space

Transportation

1 August 2006

Prepared by

J. A. VEDDA

Center for Space Policy and Strategy

National Space Systems Engineering

Prepared for

VOLPE NATIONAL TRANSPORTATION SYSTEMS CENTER

U.S. DEPARTMENT OF TRANSPORTATION

Cambridge, MA 02142

Contract No. DTRT57-05-D-30103, Tasks 3 & 8

Space Launch Operations

PUBLIC RELEASE IS AUTHORIZED

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REPORT DOCUMENTATION PAGE

Form Approved OMB No. 0704-0188 The public reporting burden for this collection of information is estimated to average 1 hour per response, including the time for reviewing instructions, searching existing data sources, gathering and maintaining the data needed, and completing and reviewing the collection of information. Send comments regarding this burden estimate or any other aspect of this collection of information, including suggestions for reducing the burden, to the Department of Defense. Executive Services and

Communications Directorate (0704-0188). Respondents should be aware that notwithstanding any other provision of law, no person shall be subject to any penalty for failing to comply with a collection of information if it does not display a currently valid OMP control number.

PLEASE DO NOT RETURN YOUR FORM TO THE ABOVE ORGANIZATION. 1. REPORT DATE (DD-MM-YYYY)

01-08-2006

2. REPORT TYPE Contractor Final Report

3. DATES COVERED (FROM - TO) January 21, 2005 – August 1, 2006 5A. CONTRACT NUMBER

DTRT57-05-D-30103 5B. GRANT NUMBER 4. TITLE AND SUBTITLE

Study of the Liability Risk Sharing Regime in the United States for Commercial Space Transportation

5C. PROGRAM ELEMENT NUMBER 5D. PROJECT NUMBER

FA2R CL411 5E. TASK NUMBER Task Orders #3 and #8 6. AUTHOR(S)

J. A. VEDDA*

5F. WORK UNIT NUMBER FA2R CL411

7. PERFORMING ORGANIZATION NAME(S) AND ADDRESS(ES) U.S. Department of Transportation

Research and Innovative Technology Administration Volpe National Transportation Systems Center Safety Information Systems Division Cambridge, MA 02142-1093

8. PERFORMING ORGANIZATION REPORT NUMBER

DOT-VNTSC-FAA-06

10. SPONSOR/MONITOR'S ACRONYM(S) AST-3

9. SPONSORING/MONITORING AGENCY NAME(S) AND ADDRESS(ES) U.S. Department of Transportation

Federal Aviation Administration

Office of the Assoc. Administrator for Commercial Space Transportation Washington, DC 20591

11. SPONSOR/MONITOR'S REPORT NUMBER(S)

12. DISTRIBUTION/AVAILABILITY STATEMENT PUBLIC RELEASE IS AUTHORIZED

13. SUPPLEMENTARY NOTES

*The Aerospace Corporation, El Segundo, CA 90245-4691 14. ABSTRACT

The Aerospace Corporation was tasked to perform an independent and comprehensive study of the liability risk-sharing regime in the United States for commercial space transportation under section 70113 of Title 49, United States Code.

The Commercial Space Launch Amendments Act of 2004 (Public Law 108-492) mandated a study on the U.S. government’s risk sharing of third-party liability for commercial space launch providers licensed by the Federal Aviation Administration (FAA). This risk-sharing regime, as described in Title 49, section 70113 of the U.S. Code, was the subject of a previous congressionally directed report issued in April 2002 by the Department of Transportation (DOT) titled “Liability Risk-Sharing Regime for U.S. Commercial Space Transportation: Study and Analysis.” The current study updates this report for congressional decision-makers who are considering the next steps beyond the current risk-sharing statute, which expires at the end of 2009. Specifically, this report provides the following:

• An objective assessment of methods by which the current liability risk-sharing regime could be eliminated or modified, including alternative steps needed to maintain a viable and internationally competitive U.S. commercial space transportation industry.

• An evaluation of the direct and indirect impacts that elimination or modification of the regime would have on U.S. competitiveness in the world launch market, and on U.S. assured access to space.

• Examination of liability risk-sharing in other nations with commercial space launch capabilities, including comparisons to the current liability risk-sharing regime in the U.S.

15. SUBJECT TERMS

Commercial Space Transportation, Liability, Indemnification, Regulation, Risk-Sharing Regime

16. SECURITY CLASSIFICATION OF: 19A. NAME OF RESPONSIBLE

PERSON James N. Hallock, Ph.D. A. REPORT U B. ABSTRACT U C. THIS PAGE U 17. LIMITATION OF ABSTRACT UU 18. NUMBER OF PAGES 73 19B. TELEPHONE NUMBER (INCLUDE AREA CODE) (617) 494-2199

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AEROSPACE REPORT NO. ATR-2006(5266)-1

STUDY OF THE LIABILITY RISK SHARING REGIME IN THE UNITED

STATES FOR COMMERCIAL SPACE TRANSPORTATION

Prepared by

J. A. VEDDA

Center for Space Policy and Strategy

National Space Systems Engineering

1 August 2006

Space Launch Operations

THE AEROSPACE CORPORATION

El Segundo, CA 90245-4691

Prepared for

VOLPE NATIONAL TRANSPORTATION SYSTEMS CENTER

U.S. DEPARTMENT OF TRANSPORTATION

RESEARCH AND INNOVATIVE TECHNOLOGY ADMINISTRATION

Cambridge, MA 02142

Contract No. DTRT57-05-D-30103, Tasks 3 & 8

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AEROSPACE REPORT NO. ATR-2006(5266)-1

STUDY OF THE LIABILITY RISK SHARING REGIME IN THE

UNITED STATES FOR COMMERCIAL SPACE TRANSPORTATION

Prepared by:

J. A. VEDDA

Center for Space Policy and Strategy National Space Systems Engineering

Approved by:

J. P. SKRATT, Principal Director Space Launch Projects

Launch Systems Division

C. J. STEELE, General Manager National Space Systems Engineering Systems Planning and Engineering Group

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Contents

Acknowledgements ... vii

Executive Summary ... ix

1. Introduction ... 1

1.1 Purpose of the Study... 1

1.2 Current Risk-Sharing Regime ... 1

1.3 U.S. Treaty Obligation for Third-Party Liability ... 2

1.4 Evolution of Third-Party Liability Coverage for Space Launch ... 3

1.4.1 Emergence of the U.S. Commercial Launch Industry ... 3

1.4.2 Amending the CSLA ... 5

1.4.3 Industry View of U.S. Government Risk-Sharing... 6

1.5 Identifying Policy Objectives ... 7

2. The Current Market and U.S. Government Risk-Sharing ... 11

2.1 A Mature Industry? ... 11

2.2 International Competitiveness ... 12

2.2.1 Measuring Competitiveness ... 13

2.2.2 Is Competitiveness an Appropriate Measure? ... 18

2.3 Possible Concerns for National Security ... 19

2.4 Additional Considerations ... 19

2.5 Relevant Experience in Other Federal Government Indemnification Programs ... 20

2.6 Observations for Commercial Space Launch Indemnification... 23

2.7 Elimination of Risk Sharing and “Betting the Company” – Perspectives from Other Large Loss Events ... 25

2.8 Summary of Observations on the Commercial Space Transportation Market and the Risk-Sharing Program ... 28

3. Elimination of U.S. Government Risk-Sharing and Possible Consequences ... 31

3.1 Alternatives ... 31

3.2 Possible Steps Toward Elimination... 33

3.3 Launch Providers’ Perspective ... 36

3.4 Launch Customers’ Perspective ... 39

3.5 Space Insurance Industry Perspective ... 39

3.5.1 Maturity of the Launch Liability Insurance Market ... 39

3.5.2 Insurance Industry Concerns ... 42

3.5.3 New Demands on the Insurance Pool... 42

3.5.4 Potential Effects of Unrelated Events or a Depressed Insurance Market ... 44

3.5.5 The Continuing Role of Indemnification... 44

4. Risk-Sharing Regimes of Foreign Competitors... 45

4.1 Background ... 45

4.2 Methodology ... 46

4.3 Liability Indemnification in Commercial Launching States ... 46

4.3.1 Australia ... 46

4.3.2 Brazil ... 46

4.3.3 China ... 48

4.3.4 Europe ... 48

4.3.4.1 Arianespace ... 48

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4.3.4.3 Starsem ... 49 4.3.4.4 Eurockot ... 49 4.3.4.5 United Kingdom ... 49 4.3.4.6 Sweden ... 50 4.3.5 India ... 50 4.3.6 Japan ... 50 4.3.7 Russia ... 51

4.4 Summary of Findings from Interviews and Questionnaires ... 52

5. Analysis and Options... 55

5.1 Assure Adequate Liability Coverage for Catastrophic Launch-Related Events ... 56

5.2 Minimize U.S. Government Risk Exposure and Annual Outlays/Subsidies... 56

5.3 Improve Economic Benefits and Strengthen the U.S. Industrial Base in Space Launch Capabilities ... 57

5.4 Options for Consideration ... 59

Appendix A: Acronyms and Abbreviations... 63

Appendix B: Statutory Language... 65

Appendix C: Participants ... 67

Figures

Figure 2.1. Herfindahl Index: Worldwide Commercial Launches 1989-2005 ... 14

Figure 2.2. Herfindahl Index: Worldwide Commercial Launch Revenues 1989-2005 ... 15

Figure 2.3. Commercial Launch Events by Country 1998-2005 ... 17

Figure 2.4. Launch Revenues for Commercial Launch Events by Country 1998-2005 ... 17

Figure 5.1 Possible Phase-Out Strategy... 60

Tables

Table 2.1. U.S. Federal Disaster Aid... 26

Table 2.2 The 10 Most Costly Terrorist Attacks in Terms of Insured Property Losses ... 27

Table 2.3 Composition of 9/11 Insured Loss Estimates as of July 2004... 27

Table 2.4 Cash Flow and Total Equity of Publicly Held Manufacturing Aerospace Companies ... 28

Table 3.1. Third-Party Launch Liability Insurance Market 2005-2014 ... 41

Table 4.1 Summary of Indemnification Regimes of Spacefaring Nations ... 52

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Acknowledgements

The Aerospace Corporation was tasked by the DOT Volpe National Transportation Systems Center to provide technical support to the Federal Aviation Administration, Office of the Associate Administrator for Commercial Space Transportation (FAA/AST), in performing this independent and comprehensive study of the liability risk-sharing regime in the United States for commercial space transportation under section 70113 of title 49, United States code. Aerospace is pleased to submit this final report, in accordance with the requirements delineated in Section F, Deliveries or Performance, of Volpe Center Contract No. DTRT57-05-D-30103.

The author is grateful to FAA/AST and the Volpe Center for the opportunity to work on this project. Specifically, gratitude is extended to Mr. Kelvin Coleman, Special Assistant for Programs and Planning at FAA/AST, and to Dr. James N. Hallock and Ms. Ann R. DiMare, who served as the Contracting Officer’s Technical Representatives (COTRs) at the Volpe Center. Gratitude is extended to Mr. Robert W. Seibold for his support and guidance as the Aerospace Corporation program manager.

Dr. Molly K. Macauley of Resources for the Future contributed substantially to Chapters 2 and 3, and Dr. Walter A. R. Peeters of the International Space University contributed Chapter 4. The author also wishes to acknowledge the support provided to Dr. Peeters by Dr. Michael Simpson and Ms. Macha Ejova.

The Aerospace Corporation is responsible for the findings and analysis contained in this report, which do not necessarily reflect the positions of its customers or the contributors to this report.

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Executive Summary

Purpose of the study

The Commercial Space Launch Amendments Act of 2004 (Public Law 108-492) mandated a study of the U.S. government’s risk sharing of third-party liability for commercial space launch providers licensed by the Federal Aviation Administration (FAA). This risk-sharing regime, as described in Title 49, section 70113 of the U.S. Code, was the subject of a previous congressionally directed report issued in April 2002 by the Department of Transportation (DOT) titled “Liability Risk-Sharing Regime for U.S. Commercial Space Transportation: Study and Analysis” (hereafter referred to as DOT/FAA 2002). The current study updates this report for congressional decision-makers who are considering the next steps beyond the current risk-sharing statute, which expires at the end of 2009.

Specifically, this report provides the following:

• An objective assessment of methods by which the current liability risk-sharing regime could be eliminated or modified, including alternative steps needed to maintain a viable and internationally competitive U.S. commercial space transportation industry.

• An evaluation of the direct and indirect impacts that elimination or modification of the regime would have on U.S. competitiveness in the world launch market, and on U.S. assured access to space.

• Examination of liability risk-sharing in other nations with commercial space launch capabilities, including comparisons to the current liability risk-sharing regime in the U.S.

Approach

For purposes of this study, U.S. commercial space launches are defined as those licensed by the FAA and conducted by a competitively selected private-sector launch provider. A large percentage of the world’s annual space launches involve payloads that are captives of a particular nation’s or region’s launch vehicles (nearly 70% in 2005),1 and therefore are not included in this discussion.

To gather a wide perspective on the influence of insurance issues on the future of commercial space transportation, this study 1) conducted interviews with representatives of the commercial space transportation and insurance industries, and 2) collected information from studies, reports, and forecasts of industry advisory groups, trade associations, academic research, and the trade press, including reports and peer-reviewed research of other industries in which government indemnification has played a role, such as the commercial nuclear power industry.

The current third-party liability indemnification regime remains in force until the end of 2009. As a result, this study’s analysis considers not only current circumstances but also the business environment that the U.S. launch industry may face in the next decade. Many factors that would affect a decision on the future of government indemnification could change:

• International competition could continue to increase.

• The number and characteristics of domestic launch providers could change significantly.

• Domestic launch providers could expand their operations through new technologies (e.g., reusable launch vehicles), new markets (e.g., space tourism), or new government policies (e.g.,

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loosening of export controls, “buy American” laws, or privatization of International Space Station operations).

• A major launch accident or Katrina-like natural disaster could disrupt the liability insurance market.

This study notes the enduring themes in U.S. public policy for the commercial space

transportation industry: the long-held position of the executive and legislative branches that the success of the U.S. commercial launch industry is in the national interest, and that it is appropriate for the

government to encourage and facilitate a healthy, internationally competitive industry. This study assumes that this view of the industry will continue for the foreseeable future. Indeed, it is likely to strengthen as the industry develops new markets, becomes a key player in NASA’s space exploration efforts, faces increasing competition from overseas, and wrestles with industrial base issues that affect government space programs across the board.

This study is intended to assist policy-makers as they judge which course of action better serves the national interest:

Maintenance of a policy/legal environment favoring the U.S. commercial space launch industry through government sharing of low-probability but potentially high-consequence third-party liability risk.

or

Phase-out of U.S. government (taxpayer) risk exposure for this hazardous private-sector activity.

This choice is the first step Congress must take to settle the indemnification issue. Each course of action brings with it a different set of implementation requirements and consequences. This study is designed to assist the Congress in determining which course of action best satisfies the following policy objectives, which collectively support the national interest in this area:

• Assure adequate liability coverage for catastrophic launch-related events.

• Minimize U.S. government (taxpayer) risk exposure and annual outlays/subsidies.

• Improve economic benefits and strengthen the U.S. industrial base in space launch capabilities by:

o Enhancing international competitiveness of the U.S. space transportation industry.

o Maintaining continuity in the business environment for U.S. launch providers.

o Encouraging new U.S. entrants to the commercial launch market.

Findings and policy options

Nearly two decades after enactment of the Commercial Space Launch Act (CSLA) Amendments of 1988, private insurance markets still are not able to provide full liability (maximum possible loss) coverage to the commercial launch industry. Private liability insurance capacity remains fragile and far below what would be needed to compensate for government indemnification if it were eliminated. Foreign competition has increased, and all credible international competitors have risk-sharing schemes rivaling or surpassing that of the U.S.

Research and interviews have revealed the following regarding the current liability indemnification regime and proposed alternatives to it:

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• The government has participated in liability risk-sharing in other areas, such as the nuclear power industry, floods, and terrorism. All of these areas have involved a gradual ramping down of government risk exposure. However, the space launch industry is not directly comparable in size, resources, or experience. Nor is it likely to evolve at a predictable rate, as demonstrated by the fact that insurance capacity in this business line is little changed from 1988.

• The current regime has become the industry standard. Its elimination could send the wrong signal (i.e., that the U.S. government has lost confidence in the commercial launch industry) to

international customers and competitors and would be a negative factor in the competition for global launch business.

• Any alternative that involves government subsidies or increased oversight would cost more than the current regime.

• The launch and insurance industries are uncomfortable with trusts and insurance pools because they believe the number of participants would be too small to build reserves in a reasonable time. In addition to being small in number, many participants are small in size and do not have the resources to make a substantial contribution.

• The indemnification regime, originally envisioned as supplementary coverage in the event of a catastrophic accident, can also serve as a backup in case a large third-party liability claim anywhere in the world curtails the availability of private-sector insurance. Without this backup, the U.S. commercial launch industry could be forced to suspend launch activity for an indefinite period, possibly causing some participants to exit the business permanently. Under these

circumstances, foreign competitors can be expected to use their government indemnification regimes to keep their launch providers active.

• Changes in foreign competitors’ risk-sharing regimes are not on the horizon. Other launching states do not plan to react to U.S. changes in any way.

By some measures (continued investment, technological evolution, ongoing partnerships, consolidation, new entrants) the U.S. commercial launch industry is mature. At some point in its development, the U.S. commercial launch industry may be able to shoulder more (and maybe all) of its liability risk. But that point is not on the immediate horizon. Stability and profitability are lacking, and the industry is still shaping itself into something that may look very different from the launch industry of the 1980s and 1990s. The robustness of the insurance market and private operators’ ability to meet

obligations in a secondary fund both appear to be lacking. While the pace of the industry’s development is impossible to predict, it is likely that it will be more than a decade before both the launch and insurance industries reach the point where risk can be accommodated without government help.

Entrepreneurial launch firms are likely to dramatically change the domestic market landscape over the next two decades. As of August 2006, small launch companies held only three active FAA licenses, and had yet to demonstrate their longevity and profitability. Several more companies with similar goals hope to prove themselves in the near future. In contrast to the large aerospace companies, whose portfolios include substantial government business in a variety of areas, commercial launch is a primary function of the entrepreneurial firms. Ultimately, the successful ones may account for the majority of U.S. commercial launch revenues. But to reach that point, this new wave of launch providers needs many more years to mature. The post-2009 indemnification regime will affect them much more than it does today, and its effect on their business plans may be more significant than it is for the plans of large launch companies today.

This analysis does not endorse the option of simply allowing government indemnification to expire at the end of 2009 with nothing to take its place. Such an abrupt change would be too disruptive of existing business plans, leaving the U.S. commercial launch industry with little time to implement alternatives.

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Other than simply allowing government indemnification to expire, the Congress has two courses of action available. The first option is maintenanceof the indemnification regime to ensure that the U.S. commercial launch industry will be able to match the liability coverage of its global competitors. Should the Congress choose this path, the following modifications to the current indemnification regime should be considered when addressing its renewal in 2009:

Make indemnification permanent. The sunset provision introduces uncertainty in the business environment and provides ammunition for the marketing efforts of foreign competitors. Future changes to the risk-sharing regime should be dependent on dramatic growth in the U.S. commercial launch industry, substantially increased capacity in the liability insurance market, and/or other changes in the business environment that may make other options viable and desirable. This will not happen on a predictable schedule. The FAA should continue to monitor indicators of industry maturity, stability, and financial strength and alert the Congress when the landscape has evolved sufficiently to warrant changes.

Remove the $1.5 billion (1988 dollars) cap on government indemnification. Since the payment of a catastrophic claim is subject to the congressional appropriations process, a cap is unnecessary. The Congress has complete control over the size of any payment.

The Congress has a second option, which is to phase-out U.S. government risk-sharing. In this case, the following steps could be taken:2

• Direct the FAA to initiate a plan that gradually changes, and eventually reverses, responsibility for Tiers II and III. (Currently, the U.S. government is responsible for Tier II and the launch industry is responsible for Tiers I and III.) Modifications to Tier I maximum probable loss are not required.

• Upon expiration of the current indemnification statute, the FAA would initiate a requirement for industry to cover its Tier III risk exposure by creating a pool or trust. The government's Tier II commitment would remain unchanged initially. When the industry pool reaches a value of $500 million, or after 5 years – whichever comes first – the government's Tier II commitment would be reduced to $1 billion.

• When the pool reaches $1 billion or 10 years, the government's Tier II commitment reduces to $500 million.

• When the pool reaches $1.5 billion or 15 years, the roles reverse. The industry pool (with a regulatory requirement to maintain a minimum value of $1.5 billion) becomes Tier II.

Government indemnification becomes Tier III, with no cap and no sunset provision, but retaining the requirement for an appropriations bill in the event of a claim.

• At this stage and at regular intervals thereafter, the FAA would assess the appropriate minimum required value of the industry pool, and recommend to Congress any changes in that requirement, if necessary.

If the Congress pursues this second option, there are several difficult issues that must be addressed:

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All dollar amounts in this description are in 1988 dollars to conform to the convention used in the CSLA Amendments. The conversion factor to 2006 dollars is approximately 1.71. In other words, $1.5 billion in 1988 dollars is equivalent to slightly more than $2.5 billion in 2006 dollars.

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• Five years may not be a long enough interval between the stages described above. This pace would require industry to increase the pool's value an average of $100 million per year (about $171 million in 2006 dollars) to match the government indemnification withdrawn at each stage.

• Companies that leave the industry would rightfully expect their contributions to the pool, plus interest, to be returned. If the industry experiences high turnover during the process, this will hinder the effort to reach and maintain the pool's targets. This problem will be particularly troublesome if one or more of the larger players exits the commercial launch business.

• The U.S. commercial launch industry is diverse. Companies vary widely in size, financial resources, and experience. A determination would need to be made as to how these differences should be taken into account for the industry pool’s contribution scheme. Should all companies contribute equally? Or should contributions vary based on a formula that accounts for financial resources, size of launch vehicles, frequency of launches, location of launch site, or other parameters? Would such a formula allow achievement of funding targets?

• A new requirement to make regular contributions to an industry pool may not, by itself, drive entrepreneurial launch providers out of the business, but it could become the proverbial “straw that breaks the camel's back.” For small companies, the added cost and risk could discourage investors or become the tipping point for decisions about going offshore or going out of business. For large companies, management may seize on this issue in considerations of whether to stay in the commercial launch business.

These issues require further study and must consider the continuing evolution of the domestic launch industry and the global business environment.

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1. Introduction

1.1 Purpose of the Study

The Commercial Space Launch Amendments Act of 2004 (Public Law 108-492) mandated a study of the U.S. government’s risk sharing of third-party liability for commercial space launch providers licensed by the Federal Aviation Administration (FAA). This risk-sharing regime, as described in Title 49, section 70113 of the U.S. Code, was the subject of a previous congressionally directed report issued in April 2002 by the Department of Transportation (DOT) titled “Liability Risk-Sharing Regime for U.S. Commercial Space Transportation: Study and Analysis” (DOT/FAA 2002).3 The current study updates this report for congressional decision-makers who are considering the next steps beyond the current risk-sharing statute, which expires at the end of 2009.

Specifically, this report provides the following:

• An objective assessment of methods by which the current liability risk-sharing regime could be eliminated or modified, including alternative steps needed to maintain a viable and internationally competitive U.S. commercial space transportation industry.

• An evaluation of the direct and indirect impacts that elimination or modification of the regime would have on U.S. competitiveness in the world launch market, and on U.S. assured access to space.

• Examination of liability risk-sharing in other nations with commercial space launch capabilities, including comparisons to the current liability risk-sharing regime in the U.S.

1.2 Current Risk-Sharing Regime

Since November 1988, the U.S. liability risk-sharing regime for commercial space transportation has been comprised of three tiers:

Tier I: Maximum Probable Loss (MPL)-Based Financial Responsibility Requirements. Third-party liability insurance requirements are set based on the FAA’s determination of the MPL that would result from licensed launch or reentry activities. The insured parties must include the licensee, its customer, the U.S. government and its agencies, and the contractors and

subcontractors. The insurance arrangement covers third parties, including government personnel, for injury, loss, or damage, up to a statutory ceiling of $500 million or the maximum available on the world market at reasonable cost. (However, the government may pay claims from the first dollar of loss in the event of an insurance policy exclusion that is determined to be “usual.”) Insurance against damage to U.S. government property is also required, with a statutory limit of $100 million or the maximum available on the world market at reasonable cost. To date, the MPL insurance requirements specified by FAA for particular launch vehicles have been well within the statutory limits.4

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The April 2002 study can be found at http://ast.faa.gov/files/pdf/FAALiabilityRiskSharing4-02.pdf. 4

With regard to the largest launchers: The Delta 4-M or M+ is required to carry flight insurance of $261 million for third-party liability and $37 million for government property damage. For the Atlas 5-521 configuration the respective requirements are $193.5 million and $100 million – the latter being equal to the statutory limit. Source: FAA Office of the Associate Administrator for Commercial Space Transportation, “Financial Responsibility Requirements as Determined by the Maximum Probable Loss (MPL) Process,” October 20, 2004.

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Launch participants also enter into no-fault, no subrogation reciprocal or cross-waivers of claims under which each participant accepts its own risk of property damage or loss and agrees to be responsible for injury, damage, or loss suffered by its employees.

Tier II: Catastrophic Loss Protection (Government Payment of Excess Claims, Known as “Indemnification”). The U.S. government may pay successful third-party liability claims in excess of required MPL-based insurance, up to an additional $1.5 billion (adjusted for post-1988 inflation – approximately $2 billion today). Such claims must be presented to the Congress by the President, upon the recommendation of the Secretary of Transportation, and the Congress must appropriate funds to pay the claim. For damage to government property, the U.S. government waives claims for property damage above the required insurance. However, the government does not indemnify a party's willful misconduct.

Tier III: Above MPL-Based Insurance plus Indemnification. If a claim exceeds the combined amount of the licensee’s MPL insurance and the government’s indemnification, financial

responsibility remains with the licensee or legally liable party.

1.3 U.S. Treaty Obligation for Third-Party Liability

The Commercial Space Launch Act provisions for third-party liability indemnification do not limit U.S. government responsibility in the case of claims arising from damage to persons or property outside the United States. Such a case would be bound by the provisions of the Outer Space Treaty of 19675 and the Liability Convention of 1972.6 Relevant language in the Outer Space Treaty is as follows:

Each State Party to the Treaty that launches or procures the launching of an object into outer space, including the moon and other celestial bodies, and each State Party from whose territory or facility an object is launched, is internationally liable for damage to another State Party to the Treaty or to its natural or juridical persons by such object or its component parts on the Earth, in air space or in outer space, including the moon and other celestial bodies. (Article VII)

The Liability Convention reinforces these points, assigning absolute liability for damages and requiring payment of compensation:

A launching State shall be absolutely liable to pay compensation for damage caused by its space object on the surface of the Earth or to aircraft in flight. (Article II)

Whenever two or more States jointly launch a space object, they shall be jointly and severally liable for any damage caused... A State from whose territory or facility a space object is launched shall be regarded as a participant in a joint launching. (Article V)

If a U.S. launch mishap resulted in damage internationally, and successful claims exceeded the MPL insurance requirement, the U.S. government would be obliged to settle the claim using mechanisms specified in the Liability Convention, which do not impose limits on such claims. The U.S. government could then attempt to recover the amount of its settlement from the participants in the launch campaign responsible for the damage.

5

Treaty on Principles Governing the Activities of States in the Exploration and Use of Outer Space, including the Moon and other Celestial Bodies (Outer Space Treaty, 1967).

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The U.S. is also a signatory to the Registration Convention,7 which requires that objects launched into space be listed in a central registry maintained by the Secretary General of the United Nations. The registry is intended to be a means to identify space objects, in part to assist in liability claims.

1.4 Evolution of Third-Party Liability Coverage for Space Launch 1.4.1 Emergence of the U.S. Commercial Launch Industry

Prior to the 1980s, launch services were a government function. The government self-insured its property and assumed liability risk for itself and its contractors. Statutory authority for indemnification of private-sector contractors was provided to the Air Force8 and the National Aeronautics and Space

Administration (NASA).9 Insurance available on the market at that time was costly and did not provide adequate coverage.

As the commercial space launch industry began to take shape in the early 1980s, established launch providers and entrepreneurs alike sought an environment that would allow them to conduct profitable business without undue regulatory burdens or financial risk. Industry representatives expressed the need for a liability risk-sharing arrangement similar to the traditional arrangement for government launches. Their primary competitor at the time, the European Arianespace consortium, modeled its risk-sharing scheme on the precedent set by NASA for commercial payloads on the space shuttle. NASA required shuttle payload customers to obtain the maximum liability insurance available at a reasonable premium, and NASA provided indemnification for any amount in excess of that coverage. Typically, $500 million was required for a single payload, and multiple payload customers could combine their contributions to reach $750 million in coverage.

The Reagan Administration set the stage for the emerging space launch industry in May 16, 1983 with National Security Decision Directive (NSDD-94), “Commercialization of Expendable Launch Vehicles” (ELVs). The policy endorsed commercialization and authorized commercial use of national launch ranges, but it also left the entire burden of liability to industry. Commercial launch operators were required to:

• provide adequate insurance to cover the loss of or damage to U.S. government-owned systems, equipment, facilities used by the private sector ELV operators;

• provide adequate insurance and agreements to indemnify and hold harmless the U.S. government against liabilities for damage to both domestic and foreign persons and property.

This liability risk responsibility was codified in the Commercial Space Launch Act (CSLA) of 1984.10 U.S. launch providers saw this level of risk as equivalent to “betting the company” on every launch. Regardless of the liability insurance requirement specified in their license by the DOT, they would ultimately be responsible for the maximum possible loss. In their view, adequate insurance coverage was not available to them, and even if it were, it would be prohibitively expensive. Meanwhile, foreign competitor Arianespace had put a cap on the liability insurance required of its customers, and had arranged for government indemnification of any claims above that cap. (Emerging foreign competitors, such as Russia and China, eventually did the same.)

7

Convention on Registration of Objects Launched into Outer Space (Registration Convention, 1975). 8

Public Law 85-804. 9

Section 308 of the National Aeronautics and Space Act of 1958, as amended. 10

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Timeline: Policy and Legislation on Commercial Space Transportation

November 1983: President designates the Department of Transportation (DOT) as the federal government’s lead agency for commercial launch activities.

February 1984: Executive Order 12465 directs DOT to act as focal point within the federal government for private sector launch contacts and to facilitate for commercial launch operators the process of identifying and satisfying the related requirements and regulations of other federal agencies concerning commercial space activities.

October 1984: Commercial Space Launch Act (P.L. 98-575) expresses congressional support for the commercial expendable launch vehicle (ELV) industry and gives Congress a direct role in the formulation and implementation of a commercial ELV policy and regulatory regime. The Secretary of DOT, in consultation with other appropriate agencies, is directed to establish insurance requirements as a condition of the ELV license it issues to commercial ELV operators to protect against risk to U.S. government property and against damages to third parties that might occur from

commercial launches; the requirements must be consistent with existing tort law and with the international obligations of the U.S. including the Convention on International Liability for Damages Caused by Space Objects in Outer Space (in which the U.S. is held strictly responsible for any damage caused by a launch from the U.S.). No provision is included for government indemnification.

Early to mid-1980s: ELV services and operations are largely a government-sponsored activity. The National Aeronautics and Space Administration (NASA) launched commercial satellites either on the shuttle or on ELVs; the government required the maximum amount of third-party liability insurance available at a “reasonable” cost from the owners of the payloads and provided indemnification for losses above those requirements. (The U.S. government had not required any first-party property insurance since the government – primarily NASA or the Air Force – was conducting all of the launch operations.)

Principal non-U.S. ELV supplier is Europe’s Ariane; export controls limit use of China’s Long March; prohibitions preclude U.S. use of the Soviet Union’s Proton. Foreign governments’ support of national launch systems includes preferential tax treatment, below-market interest rates on the financing of vehicle production or launch activities, and charging less than full-cost or not at all for insurance.

December 1986: National Security Decision Directive 254 states that NASA will no longer provide launch services for commercial and foreign payloads unless they have unique, specific reasons for being launched aboard the shuttle.

November 1988: Commercial Space Launch Act Amendments (P.L. 100-657) establishes liability and insurance regime including provision for U.S. government indemnification until December 1993.

1989: First DOT-licensed commercial space launch.

November 1992: NASA Authorization Act for Fiscal Year 1993 extends the five-year sunset provision for indemnification from December 1993 through December 1999.

October 1998: The Commercial Space Act of 1998 (P.L. 105-303) extends the Secretary of Transportation’s licensing authority to reentry vehicles and operation of reentry sites by non-federal entities; also extends requirements and provisions of the financial responsibility and risk-sharing regime to operators of reentry vehicles.

April 1999: The Departments of Veterans Affairs and Housing and Urban Development and Independent Agencies Appropriations Act of 2000 extends indemnification just one year, until December 2000. The next year, the Commercial Space Transportation Competitiveness Act of 2000 extended indemnification to December 2004.

December 2004: Commercial Space Launch Amendments Act of 2004 (P.L. 108-492) extends liability and insurance regime until 2009 and requests an independent comprehensive study of the regime.

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Sources: Senate Report 100-583, 6 October 1988, 100th Congress 2nd Session, “Commercial Space Launch Amendments Act of 1988;” Senate Report 106-135, 4 August 1999, 106th Congress, 1st Session “Commercial Space Launch Industry Indemnification Extension;” U.S. Congress, Office of Technology Assessment, Launch Options for the Future, Special Report, OTA-ISC-383, Washington, DC, July 1988; U.S. Congressional Budget Office, Setting Space Transportation Policy for the 1990s: A Special Study,

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The situation remained this way for four years, slowing the development of the U.S. commercial launch industry. The U.S. Air Force Model Expendable Launch Vehicle Commercialization Agreement issued in January 1988 did not alleviate the liability risk concerns, since it continued the practice of placing the full burden on the commercial launch provider. By this time, Arianespace had gained a dominant market share, especially after the failures of the space shuttle and other U.S. launch vehicles in the mid-1980s.

1.4.2 Amending the CSLA

Uncomfortable with the uneven playing field in the global launch market and eager to reduce risk exposure, the U.S. launch industry sought relief and found it in the CSLA Amendments of 1988.11 The solution was less comprehensive than the industry desired, since it included a cap on government indemnification and a requirement to fund liability claims through the congressional appropriations process, but it was welcomed nonetheless. In the months that followed, the Air Force modified its model launch agreement to reflect the new law.

The 1988 Amendments also codified the standard practice in which participants in a launch campaign enter into cross-waivers of claims against each other. The cross-waivers relieve participants from the need to buy liability insurance to protect against claims for damage to each other’s property, which would place additional burden on the insurance market and drive up costs for payload customers.

When the 1988 Amendments were being formulated in Congress, the House Committee on Science, Space, and Technology expressed the view that

... the government must play an active role in bringing about a commercial launch industry as a partner with the U.S. launch industry. This partnership role is fully justified in view of clearly established government obligations and responsibilities... The

Committee views this [third-party liability] risk burden on the emerging commercial launch industry as an intolerable risk that poses a major threat to the emergence of an internationally competitive launch industry. The absence of any government role in sharing this risk is also inconsistent with recent government policies to foster the U.S. industry...12

As a result, the House did not propose a cap on government indemnification, nor did it include a sunset provision in its version of the bill. The only indication that the Committee may have seen indemnification as a temporary commitment is this sentence in its report on the bill:

The Committee fully anticipates that the increased planned activities of the U.S. commercial launch industry will mobilize required insurance to fully cover launch activities.

The Senate Commerce, Science, and Transportation Committee concurred with its House counterpart on the importance of encouraging the U.S. commercial launch industry. The Senate Committee also agreed with the need for

... an adequate risk-sharing arrangement between industry and Government to enable the emerging launch industry to compete on a more equal footing with foreign launch concerns... Some limitations on the amount of liability insurance required must be

11

Public Law 100-657. 12

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established if a domestic commercial industry is to establish itself in the world. No other competing launch organization bears the costs and risks of unlimited liability.13

However, the Committee clearly did not envision an unlimited duration for indemnification. Under the Senate bill, risk sharing would end after 10 years (later changed to a five-year sunset

provision), after which “the ELV [expendable launch vehicle] industry will be dependent upon existing insurance capacity in the marketplace. Therefore, it is in the best interests of the industry to work to increase total insurance capacity over the life of this legislation.” The Committee’s rationale for the 10-year limitation was that it is

... necessary to ensure that this risk to the Government is restricted. This is both a

protection of the public treasury and a means to foster and enhance the growth of private insurance markets over the life of this legislation.

The Senate Committee expected the Secretary of Transportation to use the launch license review process to monitor and encourage the growth of private liability insurance markets to meet the future needs of the commercial launch industry. The Committee anticipated that in a decade, private insurance markets would provide full liability coverage, not just for U.S. commercial launchers, but for all commercial launch providers around the world, thus leveling the playing field for this aspect of the business.

Nearly two decades later, private insurance markets still have not achieved this goal. Worldwide, launch providers share the same insurance pool that the aviation industry uses for third-party liability coverage. Launch liability capacity remains fragile and far below what would be needed to replace government indemnification. Foreign competition has increased, and all credible competitors have risk-sharing schemes rivaling or surpassing that of the U.S. In other words, government indemnification regimes, rather than private insurance markets, have become the levelers of the playing field.

1.4.3 Industry View of U.S. Government Risk-Sharing

To properly assess industry’s position on third-party liability indemnification, it is important to consider an underlying assumption about the policy’s original rationale: Was the indemnification regime intended to provide temporary assistance to a nascent industry to help it get established? Or was it intended to be a permanent fixture in the business environment to give ongoing support to an inherently hazardous activity having economic value to the nation?

The U.S. launch industry believes that the “nascent industry” rationale is incorrect – the indemnification regime was not created with the notion that the industry would outgrow the need for it. As mentioned earlier, launch providers had established a procedure for accommodating third-party liability during their years of exclusively serving government launch customers. In the 1980s, they made the case that a similar arrangement would be needed to manage catastrophic risk in the new era of commercial launch services. The industry sees the indemnification regime as a key part of a system for managing everyone’s risk through a combination of insurance requirements that cover the launch provider, the payload owner, and the government; indemnification for catastrophic claims; and cross-waivers of liability for all participants in the launch campaign. As one respondent noted, space launch will always be a hazardous activity, and unbounded liability is a non-starter for businesses.

In contrast to the industry position, some policy-makers and analysts believe that government indemnification was intended as temporary help for the emerging launch industry. In this view, the

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regime was initiated because the space insurance market of the late-1980s was not up to the task of adequately covering third-party liability at a reasonable price, but was expected to eventually take over full responsibility as the insurance pool became more robust. As a result, the statutory language

establishing the indemnification regime included a sunset provision to ensure periodic reconsideration of the continuing need for government risk-sharing.

Clearly, at the inception of the indemnification regime there were differences between industry and policy-maker (particularly Senate committee) perceptions of the problem and its long-term resolution. These differing viewpoints persist today. A number of lawmakers see indemnification as an unnecessary subsidy to the launch industry, particularly its largest corporations. Industry representatives note that no federal funds, tax breaks, or other financial favors have been granted to them under the indemnification regime thus far, so it can hardly be considered a subsidy. They see it as an appropriate government role to share catastrophic risk (as in the nuclear power industry and flood insurance) and to level the international playing field.

Whatever their view on the original justification for indemnification, some analysts and space insurers point out that the context has changed since the risk-sharing regime began in 1988. The insurers have gained experience, but the market remains fragile. Foreign competition has increased, and

competitors’ governments are providing third-party indemnification as good as or better than that provided by the U.S. There is broad agreement among launch providers and payload customers that government risk-sharing for third-party liability has become an industry standard.

1.5 Identifying Policy Objectives

Determination of a course of action hinges on the establishment and prioritization of policy goals. Revision, or elimination of government indemnification for third-party liability could have potentially adverse consequences for the U.S. commercial launch industry and for national interests. Current national policy on space transportation14 states the following goal:

Encourage and facilitate the U.S. commercial space transportation industry to enhance the achievement of national security and civil space transportation objectives, benefit the U.S. economy, and increase the industry’s international competitiveness.

This goal mirrors previous national policy statements.15 Toward that end, U.S. government departments and agencies shall:

Maintain, subject to periodic review and the competitiveness of U.S. industry, the liability risk sharing regime for U.S.commercial space transportation activities set forth in the Commercial Space Launch Act, as amended (49 USC, Subtitle IX, Chapter 701), including provisions for indemnification by the United States Government.

The inclusion of this statement in the national space transportation policy indicates that the current risk-sharing regime is viewed as contributing to national objectives, the economy, and U.S. competitiveness. It also recognizes the need for periodic review.

14

National Security Presidential Directive 40, “U.S. Space Transportation Policy,” December 21, 2004. 15

Presidential Decision Directive 4, “National Space Transportation Policy,” August 5, 1994; White House Fact Sheet, “Commercial Space Launch Policy,” September 5, 1990; National Security Decision Directive 94, “Commercialization of Expendable Launch Vehicles,” May 16, 1983.

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For the past two decades, the White House and Congress have been in close agreement on this issue. When the House Committee on Science, Space, and Technology amended the Commercial Space Launch Act in 1988, the stated rationale for doing so was as follows:

(1) a United States commercial space launch industry is an essential component of national efforts to assure access to space for government and commercial users;

(2) the Federal Government should encourage, facilitate, and promote the use of the United States commercial space launch industry in order to continue United States aerospace preeminence; (3) the United States commercial space launch industry must be competitive in the international

marketplace;

(4) Federal Government policies should recognize the responsibility of the United States under international treaty for activities conducted by United States citizens in space; and

(5) the United States must maintain a competitive edge in international commercial space transportation by ensuring continued research and development in launch vehicle component technology.16

The CSLA, which the Congress revisited in 2004, includes the following among its findings:

• The development of commercial launch vehicles, reentry vehicles, and associated services would enable the United States to retain its competitive position internationally, contributing to the national interest and economic well-being of the United States.

• Providing launch services and reentry services by the private sector is consistent with the national security and foreign policy interests of the United States.

• The United States should encourage private sector launches, reentries, and associated services.

• Space transportation ... is an important element of the transportation system of the United States, and in connection with the commerce of the United States there is a need to develop a strong space transportation infrastructure with significant private sector involvement. 17

From this current and historical evidence, it is clear that the executive and legislative branches have consistently viewed the success of the U.S. commercial launch industry as beneficial to national interests. This view of the industry presumably will continue for the foreseeable future, and may strengthen as the industry develops new markets (such as space tourism), becomes a key player in NASA’s space exploration efforts, faces increasing competition from overseas, and wrestles with industrial base issues that affect government space programs across the board.

This study is intended to assist policy-makers as they judge which course of action better serves the national interest:

Maintenance of a policy/legal environment favoring the U.S. commercial space launch industry through government sharing of low-probability but potentially high-consequence third-party liability risk.

or

Phase-out of U.S. government (taxpayer) risk exposure for this hazardous private-sector activity.

This choice is the first step Congress must take to settle the indemnification issue. Each course of action brings with it a different set of implementation requirements and consequences. This study is designed to

16

House Report 100-639 on H.R. 4399, Commercial Space Launch Act Amendments of 1988, May 19, 1988. 17

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assist the Congress in determining which course of action best satisfies the following policy objectives, which collectively support the national interest in this area:

• Assure adequate liability coverage for catastrophic launch-related events.

• Minimize U.S. government (taxpayer) risk exposure and annual outlays/subsidies.

• Improve economic benefits and strengthen the U.S. industrial base in space launch capabilities by:

o Enhancing international competitiveness of the U.S. space transportation industry.

o Maintaining continuity in the business environment for U.S. launch providers.

o Encouraging new U.S. entrants to the commercial launch market.

* * *

Chapter 2 analyzes the current competitive environment and discusses U.S. government experience in risk sharing with other industries. Chapter 3 assesses options for eliminating the current indemnification regime, summarizes the views of industry, and discusses possible consequences of elimination. Chapter 4 presents the results of a survey on the current status and plans for government indemnification in other spacefaring nations. Chapter 5 presents analysis of the policy implications of the two courses of action identified above.

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2. The Current Market and U.S. Government Risk-Sharing

The success of the U.S. commercial launch industry in delivering a host of new and expanded voice, video, navigation, and Earth observation services in the past two decades reflects in part the heritage of supportive U.S. national public policy. Beginning with the 1983 designation of the Department of Transportation as the federal government’s lead agency for commercial space

transportation, subsequent policy initiatives have sought to assist and nurture the industry in its evolution from government domination to commercial orientation.

Advocates of the indemnification provisions of the CSLA amendments argue that risk sharing has been and will continue to be an essential component of effective U.S. policy and that in their absence, the competitiveness of U.S. commercial launch services would be severely undermined. Another school of thought takes the opposite view, finding inadequate justification for continuing indemnification for a number of reasons and in some cases, expressing strong reluctance about government involvement in a commercial industry.

This chapter first presents the arguments on both sides, then discusses the data and analyses that are available to quantify the role of indemnification in supporting the industry as well as the policy objectives in the 1988 CSLA amendments. The analysis finds that publicly available quantitative data provides no direct evidence that indemnification is essential for competitiveness or that it otherwise accomplishes policy goals. Much of the information that could best inform this study is held as

proprietary by industry. Even so, there are possibly compelling arguments for maintaining at least some degree of indemnification or, if eliminating it, doing so only gradually. Discussion of these findings paves the way for the options presented in the next chapter.

2.1 A Mature Industry?

By including the sunset provision, the original legislative intent of government risk-sharing clearly expected eventual elimination of indemnification. The record of debate shows nearly unanimous concern about the need to nurture a “nascent” commercial space transportation industry. The sunset provision was a compromise, however, as it was marked by sharp disagreement among the Senate, the House of Representatives, and the Reagan Administration.

The Senate had proposed a sunset to take place ten years after passage of the amendments. Expectations were that after ten years, (1) the fledgling launch industry would have gone through a “full cycle” of customer service (from taking a launch request of a payload owner/operator, to preparing the launch vehicle and integrating the payload, to scheduling and conducting the launch) and (2) the insurance industry would be able to provide coverage.

Discussion in the House was largely silent on any sunset provision, and its version of the amendments made no provision for elimination of the indemnification policy. At the other extreme, the Reagan Administration generally opposed any role for government in commercial space launch insurance, envisioning a fully private sector launch industry with little government intervention. In addition, the late 1980s were a time of large cyclical disruption in most major property and casualty insurance markets and the Administration was arguing for major tort reform throughout the entire insurance industry.

As a compromise, the final version of the amendments provided a five-year sunset provision. Indemnification would be available only for launches conducted pursuant to an application submitted to the Department of Transportation by the end of 1993. As noted previously, Congress has since extended indemnification four times.

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Has a mature industry evolved along with the extensions of the risk-sharing regime? By all generally accepted measures of industry maturity, the conventional U.S. ELV industry is fully mature. The industry completed 161 successful launches by mid-2006.18 Also indicative of maturity, the industry has engaged in R&D on modifications to the existing fleet and the addition of new vehicles. These efforts have led to a new generation of expendable vehicles (modified versions of Delta and Atlas; Pegasus, Taurus, Athena, Falcon) and new practices such as sea-based (Sea Launch) and air-launched (Pegasus-type) approaches.

Another maturity measure is industry growth, acquisition, and reorganization. The launch industry has seen entry of newcomers (Orbital Sciences, SpaceX), consolidation among incumbent suppliers (for example, McDonnell Douglas and Boeing), and partnerships such as International Launch Services19 and Sea Launch.20 Recently, companies have created partnerships to provide “integrated schedule assurance,” by which customers can turn to another company’s (as well as country’s) vehicle in the event of a problem with the original vehicle.21 In 1996, the FAA granted the first license for spaceport operation (to California Spaceport) and has since issued five more licenses for launch site operators (in Florida, Virginia, Alaska, Oklahoma, and Mojave Airport, California). These are measures of a mature industry; hence at least one of the concerns expressed by the Congress in 1988 has been satisfied.

2.2 International Competitiveness

During nearly two decades of deliberations on extension, it can be argued that public debate has come to confuse the maturity of an industry with its competitive or financial success. To be sure, both characteristics were important to policymakers in 1988. In fact, a statutory objective of the CSLA is that “the United States commercial space launch industry must be competitive in the international

marketplace.” But a public policy dilemma often arises when an industry evolves to maturity but then struggles competitively and financially, particularly in international markets (the situations of the steel, auto, and electronics industries are examples). At that point, the role for government intervention typically becomes particularly contentious. The distinction is important because the appropriate public policy for maturity may differ markedly from the appropriate policy for competitive or financial success.

The space transportation industry representatives interviewed for this report are adamant that indemnification is essential for their international competitiveness (their comments are reported in Chapter 3). International competitiveness can be measured to some extent, but identifying the contribution of indemnification is impossible to discern in the absence of good data. The publicly available data show that U.S. companies have a very small share of the commercial market, but the role indemnification may play in improving this situation cannot be conclusively demonstrated. For this reason, if the goal of maintaining or increasing market share in the international commercial market is a desired policy objective, then other steps (such as price supports) may be necessary. This course of action is not addressed by this report, but the point is relevant to this policy debate.

18

Department of Transportation, FAA/AST, “Historical Launch Activity” at

http://ast.faa.gov/linfo_vsite/historical_la.cfm (accessed July 2006). An additional 17 launches were attempted but unsuccessful for a variety of reasons.

19

Lockheed Martin (50%) and Khrunichev State Research & Production Space Center of Russia (50%). 20

Boeing (40%), RSC-Energia of Russia (25%), Kvaerner ASA of Norway (20%), SDO Yuzhnoye/PO Yuzhmash of Ukraine (15%).

21

If Sea Launch encounters a problem and is unable to launch a payload, the customer can turn to the Ariane 5, Zenit 3SL, and H-IIA launch vehicles under the Launch Service Alliance formed by Arianespace, Boeing Launch Services, and Mitsubishi Heavy Industries. International Launch Services offers customers Altas or Proton vehicles as back-up. (2006 Forecast, p. 23).

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2.2.1 Measuring Competitiveness

There are two sources of competition in commercial markets: competition among existing companies and the competitive threat posed by potential new companies (this mere “threat” can serve to keep prices low). Analytically, the data which demonstrate competitiveness are market shares, which reflect a mix of both quantity and price – that is, number of launches and the revenue they bring in. The most effective ways to gain market share in a competitive market are to lower prices or to offer a unique product that is in high demand.

Unfortunately, price (revenue) information for commercial launches is not publicly available. The FAA reports prices for commercial launches but emphasizes that these are at best a rough approximation, stating in footnotes to its Quarterly Launch Reports that price data “vary for each commercial launch.” Reported prices are widely known to be highly imprecise for several reasons. A contracted price may differ from the reported price because it includes individually negotiated customer concessions,

differences in launch facility pricing policies, and a host of other factors. One of the concerns emphasized by U.S. industry in commenting on the need for continued indemnification is the price concessions that U.S. companies must continue to make to attract customers. The trade press reports that launch providers are offering prices that are so greatly reduced that vehicles are marketed at a loss.22 The difficulty in evaluating this argument is that the nature and size of these concessions is not public record. The FAA data show no price trends, either up or down, even with the market entry of foreign vehicles during the last decades. Reported launch prices have remained roughly unchanged during this period.

The data problem is not unique, however, and the federal government endorses alternative methods for assessing competition. Industries are typically reluctant to report price information, and the launch industry is no exception. A proxy measure, the H index, has come to be routinely used by the U.S. Department of Justice and other analysts as an indication of competitiveness. (The index is named for its developers, O.C. Herfindahl and A.O. Hirschman). The index is not a perfect measure of competition (and economists and other analysts have long expressed concern about its biases and interpretation) but does shed some light on the degree to which existing companies face and meet competition. The index uses a weighted average of market shares and indirectly measures companies’ ability to exercise power by setting prices above the prices that would prevail in a competitive market.

The H index combines data about the number of existing companies and the size of their share of the market.23 Because a market could have many companies but one or a few companies may dominate, the formula of the index attempts to combine these data in a statistically acceptable way. An index close to zero indicates a competitive market – no company’s market share is very large. As the index

approaches 1, a single entity dominates the market. If the market has just one seller, the index is at its maximum value of 1 – that seller is a monopolist. The index declines with an increasing number of companies.

The H index calculated for the share of the market represented by the commercial launching states of the U.S., Russia, Europe, and China is one guide for observing the extent of competition faced by U.S. companies. Data on the number of launches by launch vehicle and launch revenue are available for 1989-1998 from Isakowitz (1999) and for 1999-2004 from FAA/AST.24 As both of these data sources

22

John Edwards, “ELV Market on the Up,” Aviation Week and Space Technology 2005 Aerospace Source Book

(McGraw Hill), January 17, 2005, 135-136. 23

The index is defined as H = (s1 )2 + (s 2 ) 2 +…. + (sn ) 2 where s is a firm’s percentage of total sales (market share) and n is the number of firms.

24

Steven J. Isakowitz, Joseph P. Hopkins Jr., and Joshua B. Hopkins, International Reference Guide to Space Launch Systems (Reston, VA: American Institute of Aeronautics and Astronautics), 1999; Federal Aviation

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emphasize, revenue information is approximate because of the poor quality of price data. Following FAA/AST practice, launches of Sea Launch are treated separately as “multinational launches” rather than classifying them as launches by one country. (If launches by Sea Launch are classified as U.S. launches, or if a “fraction” of a Sea Launch is so classified, to reflect the U.S. ownership share, the H values for the launch market are larger, reflecting the relatively large share of the market increasingly represented by Sea Launch.)

The usefulness of reviewing both number of launches and launch revenue is that launch quantities

are often referenced in public debate about competitiveness, but launch revenues more directly impact the bottom line. For example, a more competitive market in terms of shares of launches could mean that each individual company supplies fewer launches. A less competitive market in terms of revenue may mean that a few companies supply a few expensive launches, taking larger revenue shares and causing competition in terms of revenue to fall.

Figure 2.1: Herfindahl Index

Worldwide Commercial Launches 1989-2005

_

Lower values indicate greater competition

0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 1989-1993 1994-1998 1999 2000 2001 2002 2003 2004 2005 Year Ind e x NGSO GEO

Source: Data for 1989-98 from Isakowitz et al. (1999); for 1999-2005 from FAA/AST Commercial Space Transportation Year in Review report for each year.

Figures 2.1 and 2.2 show the H indices for worldwide number of commercial launches and launch revenues for non-geostationary Earth orbit (NGSO) and geostationary Earth orbit (GEO) launch markets from the 1980s to the present. By measures of both launches and revenues, the GEO market has become more competitive over time.

Administration, Administrator for Commercial Space Transportation, Year in Review, each year, 1999 – 2004. Because the earlier data are collected by slightly different collection methods, data for 1989 – 1998 are represented as two five-year averages (1989-1993 and 1994-1998).

Figure

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References

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Related subjects : Space Transportation